Karnataka budget's puzzling question: Why has the govt cut capex by nearly 28 percent?

Siddaramaiah’s budget has thrown up a few questions.

In India’s budget-making history, Karnataka Chief Minister Siddaramaiah’s presentation of the state’s 2024-25 budget will perhaps stand out for its length. It was a three-hour long speech that stitched a political economy roadmap along with a macro outlook.

There’s, however, other pieces of statistics that macroeconomists and fiscal policy experts will be keenly analysing, such as capital expenditure trends.

Siddaramaiah’s budget leaves a puzzling question. Why has the government planned to cut down on capital expenditure, that too by nearly 28 percent over 2023-24? This needs careful scrutiny and some explanation too.

For 2024-25, the Karnataka government has pencilled in Rs 55,877 crore as capital expenditure. This is lower by 27.5 percent from the revised capital expenditure estimates of Rs 77,105 crore for 2023-24.

A more appropriate question to ask, perhaps, would be: capital expenditure will account for what proportion of the Karnataka government’s spending for 2024-25? Or better still, how has the Karnataka government’s capital expenditure as a proportion of total expenditure set to grow in 2024-25 over 2023-24?

The answers to these reveal one significant aspect: the state government’s spending focus on creating infrastructure assets.

Expansionary Budget, Contracting Capex

There’s something worrying that appears to be hiding in the details. First, the state government’s size of the budget—the total expenditure—is set to grow 16.8 percent, from Rs 3.17 lakh crore in 2023-24 to Rs 3.71 lakh crore in 2024-25. To that effect, the budget is expansionary.

The problematic slice, however, is in capital expenditure, which is set to contract by 28 percent even during a year when the state government is set to expand its spending by 16.8 percent.

There’s another piece that could be disturbing. Capital expenditure as a proportion of the government’s total spending is set to fall. In 2023-24, nearly a quarter or 24.2 percent of the Karnataka government’s total spending was on capital expenditure. In other words, for every Rs 100 spent in 2023-24, Rs 24 would be on capital expenditure.

That is set to fall dramatically. In 2024-25, capital expenditure will account for 15 percent of the state’s total spending, implying that for every Rs 100 spent during the year, only Rs 15 will be set aside or used up as capital expenditure.

Contrast To Union’s Capex Focus

From a macroeconomic and public finance point of view this does not make for a happy reading. Broadly, capital expenditure, by definition, should show an upward trend. Lowering of capital expenditure would essentially imply a dimming focus on asset creation. This also runs contrary to the path the union government has taken, which continues to do the heavy lifting on investment.

For instance, Union Finance Minister Nirmala Sitharaman has estimated a capital expenditure of Rs 11.1 lakh crore in 2024-25, a growth of 11.1 percent over 2023-24. This comes on the back of a 33 percent—from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24

The focus on capital expenditure relies on the principle that higher public investment in infrastructure projects unleashes economic growth through multipliers. Highways and ports are long gestation projects, but can create jobs, with cascading benefits on intermediate industries such as cement and steel.

The Union government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure project execution, but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.

The Karnataka government’s reduced budgetary focus on infrastructure as seen through the prism of capital expenditure belies macroeconomic prudence and wisdom.

Worrying Non-Scheme Based Expenditure Rise

For states, the essential marker of healthy public finance management would be not to slip onto the wrong side of the `committed expenditure’ components: scheme-based and non-scheme-based.

This is another front where Siddaramaiah’s budget has thrown up a few questions.

Non-scheme-based revenue expenditure is not associated with a particular programme or scheme but is necessary for the overall functioning of the government. Major constituents of non-scheme-based expenditure are salaries, pensions, Interest payments and administrative expenses.

Scheme-based revenue expenditure, on the other hand, is directly related to delivering a particular service or achieving a defined objective through a government-approved programme or scheme. Components of Scheme-based expenditure are subsidies, social security pensions, financial assistance, grant-in-aid (non-salaries) and devolution to local bodies.

Non-scheme-based expenditure is set to grow to 61 percent of the state’s total revenue receipts in 2024-25, up from 56 percent in 2023-24 and further higher than 48 percent in 2022-23.

This is a red flag that would prompt fiscal purists to stand up and take notice. The signal from this is pretty straightforward: the state government isn’t willing to do heavy lifting on infrastructure and asset creation that is necessary to spin jobs and multiply income. This approach needs a course correction.

Gaurav Choudhury is consulting editor, Network 18. Views are personal, and do not represent the stand of this publication.